Economic recovery to continue

Pami Dua & Anirvam Banerji, Oct 1, 2002, 12.02am IST

The DSE-ECRI Indian Leading Index, designed to anticipate expan-sions and recessions, increased marginally from 167.2 in May to 167.7 in June. Further, the growth rate of the leading index, a harbinger of speed-ups and slowdowns, hovered around the May level of 11.5%, much higher than the 7.7% growth in April and 5.3% in February.

Thus, the level and the growth rate of the leading index signal that the modest recovery that is currently underway is expected to continue.

Signs of a modest recovery are evident from the increase in the DSE-ECRI Indian Coincident Index, a composite index of output, income, employment and sales that monitors current economic activity. The index rose to 158.9 in June from 157.9 in April and 150.7 a year ago. Its growth rate was 3.2% in June compared to less than 1% a year ago.

That an industrial recovery is clearly underway is apparent from the 6.4% growth in the industrial production index in July, up from 2.6% in the corresponding month last year. Industrial growth has, in fact, doubled to 4.7% year-on-year from April to July 2002, as against 2.3% in the corresponding period last year.

Capital goods also recorded an impressive growth of 5% from April to July 2002 as against 6.3% in the previous year. Growth in the infrastructure sector has also been robust at 6.7% from April-August 2003 compared to 1% in the corre-sponding period last year. Cement and steel have been the main con-tributors to this expansion with growth rates of 11.6% and 8.9% re-spectively in the first five months of the current fiscal year, reflecting a pick-up in construction activity.

The worrying spot is the agricultural sector, which shows a drop of 18.6% in kharif grain output per the initial official estimates of crop production, the worst kharif performance in 13 years. This effect will percolate to other sectors and can hamper the industrial recovery, al-though with a lag.

Other disturbing domestic factors include the UTI bailout as well as the proposed bailout of IFCI and IDBI. Furthermore, the shelving of the sale of two public sector oil companies is a setback to the privatization programme. These factors undoubtedly have ad-verse implications for the fiscal deficit.

On the other hand, the external sector's performance is buoyant with double-digit growth in exports from April to July due to the recovery in global trade. Strong growth is also predicted by the Leading Index for Exports (constructed by the authors) that is a composite of leading indices of India's major trading partners and heralds growth in the ex-ports sector. The Leading Index for Exports grew by 9.6% in May compared to a decline of 34% a year ago.

The global economy is crawling out of its worst recession in a quarter century. As usual, the US needs to be the engine of this revival. It is important to recognize that the US economy is indeed in a recovery, with GDP having risen at a 3% annual rate in the last three quarters, which is sub-par for a recovery but still positive. Unfortunately, the other major economies are in still worse shape, with Japan possibly headed into a double-dip recession, and Germany not yet in a clear re-covery.

(Ms Dua is professor at the Delhi School of Economics and Mr Banerji is the director of research at Economic Cycle Research Institute, New York. The authors gratefully acknowledge support from the ICICI Re-search Centre for the ongoing maintenance of the leading and coinci-dent indexes).